Bank of Scotland (1695-)

Banknotes

Bank of Scotland was established by an Act of the Parliament of Scotland on 17th July 1695 'for the Carrying on and Managing of a Public Bank'. It is the only bank ever to be founded by such an Act and the only commercial institution created by the Scots Parliament which is still in existence. It is also unique in being the oldest surviving UK clearing bank founded specifically to make a business of banking.

The founding Act permitted the Bank's directors to raise a nominal capital of £1,200,000 Scots (£100,000 Sterling). It also granted a monopoly on banking in Scotland for 21 years, and its proprietors (shareholders) were given limited liability. The final clause of the Act (which was only repealed in 1920) provided that 'all Foreigners, who shall join as Partners of this Bank, shall thereby be and become Naturalised Scotsmen, to all Intents and Purposes whatsoever'. The Bank was set up primarily to help develop Scotland's trade, mainly with England and the Low Countries. It began business in February 1696 with a working capital of £120,000 Scots (£10,000 Sterling). The 172 shareholders (including 36 based in London) came mainly from Scotland's political and merchant elite. What they required was a banking system which would offer long-term credit and security for merchants and landowners alike.

Bank of Scotland was the first bank in Europe to successfully issue paper currency, redeemable for cash on demand - an extremely useful service given the unreliability of the Scots coinage of the 1690s. The right to issue banknotes has been maintained to the present day. Following the Act of Union of 1707, the Bank supervised the reminting of the old Scottish coinage into Sterling.

There have been threats to the right of banknote issue at various times in the Bank's history. In 1826, for example, there was outrage in Scotland at Parliament's attempt to prevent the issue of notes for under £5. Sir Walter Scott wrote a series of thinly-disguised letters to the Edinburgh Weekly Journal under the pen-name Malachi Malagrowther, which were immediately reprinted as a pamphlet. These letters provoked such a sensation that the Government eventually relented and allowed the Scottish banks to continue issuing £1 notes. To this day, Scott's portrait appears on Bank of Scotland notes.

Bank of Scotland's monopoly expired in 1716 and in 1727 the Royal Bank of Scotland was founded by Royal Charter. There followed a generation of intense competition as the two banks tried to drive each other out of business. This 'Bank War' was more or less over by the early 1740s.

During the Jacobite Rebellion of 1745, despite being known as the 'Jacobite Bank', the directors of Bank of Scotland decided to withdraw banknotes from circulation ahead of the Highland army of 'Bonnie Prince Charlie' as it marched south towards Edinburgh. All the Bank's papers and valuables were transferred to Edinburgh Castle for safe-keeping and the Bank closed its doors for several weeks until the rebel army left the city.

After 1750, the focus of economic development in Scotland shifted to Glasgow and the west. This led to an increase in the number of partnership banking companies in Glasgow and in the other major Scottish burghs. Bank of Scotland took the lead at this time in establishing security and stability for the whole Scottish banking system - a particularly valuable role after the disastrous collapse of the Ayr Bank in 1772.

Early attempts by the Bank to establish a branch network were unsuccessful and it was not until 1774 that the first branches were opened in Dumfries and Kelso. By 1795 there were 27 branches: this had risen to 43 branches by 1860 and to 265 branches by 1939. The Bank's branch in London was opened in 1865. Today the Bank has over 300 branches throughout Scotland and 24 offices in England.

In the 19th century there were a number of changes to Scotland's banking system. One development was the rise of large-scale joint stock banks with significant numbers of shareholders. These provided much more serious competition for Bank of Scotland, particularly as most of the newcomers also had large branch networks. The increase in the number of banks, some of which pursued reckless lending policies led to occasional failure. In 1857 the Western Bank collapsed. Bank of Scotland, along with the other major Scottish banks, stepped in to maintain confidence in the Scottish banking system and ensured that holders of the Bank's notes were paid. In 1878 the City of Glasgow Bank also collapsed in spectacular fashion, ruining all but 254 of its 1,819 shareholders. The disaster shifted the focus of finance back to the more conservative practices of the Edinburgh banking community.

The early years of the twentieth century brought a new group of customers to Bank of Scotland whose businesses were at the forefront of the new technology of the day. These required sophisticated financing and assessment on a scale previously unknown to the Bank. During the First World War the Bank was required to refocus its policies on national need.

Following the difficulties of the interwar years and the Second World War, the general climate improved in the 1950s. In 1958 the Bank expanded its business operations into consumer credit through the acquisition of North West Securities Limited (now Capital Bank plc), which has continued to specialise in this field.

In the last thirty years there has been a rapid expansion in the Bank's activities, reflecting the changes in the Scottish economy as a whole. The Bank played a central role from 1969 in financing the developing North Sea oil industry which led to the establishment of branches in the USA and Russia, and a full International Division. (The Bank opened its first overseas office in Houston, Texas in 1975).

Rapidly-changing technology has radically altered the face of banking. In 1959 Bank of Scotland was the first UK bank to install a computer to process its accounts centrally and the Bank has continued to innovate in the application of technology to financial services. Bank of Scotland Group as it now stands is the result of a series of amalgamations. The most important of these were with the Glasgow-based Union Bank of Scotland in 1955, and with the British Linen Bank in 1971. In 1977 the British Linen Bank was revived as the Bank's merchant banking subsidiary. Bank of Wales was established as a regional bank in 1986. In 1995, the Bank of Western Australia Limited was acquired, again extending the Bank's international role. Bank of Scotland Group now employs almost 20,000 people in companies and countries across the globe.